News & Views

04/06/17

Expert lauds fuel marking plan in tax reform bill

A recognized global expert on energy security has lauded the government’s plan to introduce a fuel marking and monitoring system in the local downstream oil industry as a way to curb fuel smuggling that has been costing the government an estimated P26.9 billion to P43.8 billion in foregone revenues each year.

Dr. Ian Ralby, a nonresident senior fellow with the Atlantic Council’s Global Energy Center, said at a congressional hearing that oil smuggling not only leads to billions of pesos in lost revenues, but also could be the second largest source of funding for criminal operations, second only to narcotics trafficking.

“There’s a lot of things now that people have tried, and we’ve seen what has been successful and what has failed. There are a few quick wins that are proving to be successful,” said Ralby at a recent hearing of the House ways and means committee chaired by Quirino Rep. Dakila Carlo Cua.

“The first and foremost among them is fuel marking, and that is why I commend the Philippines for taking on this initiative, and I think that is exactly the right thing to be focused on,” Ralby said.

The implementation of the fuel marking system was proposed by Cua and the Department of Finance (DOF) as a key provision of House Bill No. 5636, or the proposed Tax Reform Acceleration and Inclusion Act (TRAIN) Act.

TRAIN, the first package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), was approved by the House of Representatives by a 246-9 vote with one abstention last May 31 before the Congress’ sine die adjournment.

This bill, which had consolidated the DOF’s original proposal—HB 4774—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient by slashing personal income tax rates and, to fill up the consequent revenue loss, by adjusting excise taxes on certain products and broadening the Value Added Tax (VAT) base.

Fuel marking has been made mandatory under HB 5636.

HB 5636 was passed after President Duterte had certified the bill as urgent, given that it was designed to help provide a steady revenue stream to his government’s ambitious high—and inclusive—growth agenda anchored on record spending on infrastructure, human capital and social protection for the poor and other vulnerable sectors.

In his letter to Senate President Aquilino Pimentel III and Speaker Pantaleon Alvarez, President Duterte said, “The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty.”

Finance Secretary Carlos Dominguez III, who had earlier asked the President to certify the tax reform bill as urgent, said in his memorandum to the Chief Executive that this TRAIN bill is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022.”

In the same memo, Dominguez told Mr. Duterte of the “dire consequences” of the Congress’ failure to write a tax reform law. “The government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the Gross Domestic Product (GDP) would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.,” he said.

Financial institutions have welcomed the House approval of the tax reform bill. Deutsche Bank said that “Beyond its fundamental economic benefits, [the tax reform bill’s] passage would send investors a strong signal that the administration has the political will to pass unpopular laws to institute long-term structural economic reforms.

Nomura said “the timeliness of the vote and the decisive result again underscore the strong priority that Duterte places on the economic reform agenda and his strong control over Congress.”

However, the Asian Development Bank has pegged it at a higher figure of P37.5 billion in losses annually while a study commissioned by the local oil industry estimated foregone revenues at a much higher P43.8 billion per year.

The Institute for Development and Econometric Analysis (IDEA) estimated that “smuggled gasoline accounts for an average of 23 percent of gasoline consumption from 2000 to 2006,” while “smuggled diesel accounts for an average of 6 percent.”

Ralby said at the hearing that the Philippines’ fuel marking system, which will be implemented by the Bureau of Customs (BOC) with assistance from the Bureau of Internal Revenue (BIR), could serve as an “instructive model” for other countries and encourage them to address the worsening problem of oil smuggling across the globe.

“Certainly when it comes to the maritime aspects, very few countries have the opportunity that is afforded by the Philippines’ geography. To do that as an archipelago, I think that would be an instructive model for a lot of other countries as they come to terms with the issue and begin to address it,” said Ralby, who is also a recognized expert on maritime security, international law and transnational crime.

Ralby told lawmakers the mandatory fuel marking system being proposed in HB 5636 will be an opportunity for the Philippines to be “one of the global leaders” in combating illicit fuel activity, as “not many countries have really taken on the issue of fuel theft.”

Said Ralby: “Why should we care about this? Why are we here talking about this today? The financial loss due to illicit fuel activity globally is immense. We do not have accurate statistics yet on the full-blown picture but we are led to believe that this is at least the second-largest in terms of value for criminal operations, second only to narcotics as far as we can tell.”
He said that while he has no specific statistics on the Philippines, he estimated that “as much as 30 percent of the fuel here in this country” comes from illicit operations.

According to Ralby, oil smuggling has become a major financial concern in the European Union, where estimates show that the bloc lost nearly 4 billion euros in tax revenues from this illicit activity in 2012 alone.

In Mexico, some $1.2 billion from oil smuggling is believed to have found its way to criminal operations.

He said the situation is even much worse in Algeria, where fuel shortages have been experienced as a result of the rampant cross-border smuggling of oil from that country to Morocco.

Citing statistics from the Algerian energy ministry, Ralby said oil smuggling has been costing Algeria some $2 billion in financial losses annually given that some 1.5 billion liters of its government-subsidized fuel are being illegally exported out of the country to Morocco.